Obama Plans Major Shifts in Spending

Friday

Feb 27, 2009 at 5:19 AM

President Obama’s budget plan tries to trim a deficit estimated at $1.75 trillion for 2009 as it redirects wide streams of spending.

JACKIE CALMES

WASHINGTON — Proclaiming a “once in a generation” opportunity, President Obama proposed a 10-year budget on Thursday that reflects his determination in the face of recession to invest trillions of dollars and his own political capital in reshaping the nation’s priorities.

Mr. Obama would overhaul health care, begin to arrest global warming, expand the federal role in education and shift more costs to some corporations and the wealthiest taxpayers.

In a veiled gibe at the Bush years, Mr. Obama said his budget broke “from a troubled past” and attributed the current economic maelstrom to “an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies’ executive suites to the seats of power in Washington, D.C.”

Without trimming his ambitious campaign promises, the president projects a budget for the 2010 fiscal year of nearly $3.6 trillion. He said he would shrink annual deficits, now at levels not seen in six decades, mostly through higher revenue from rich individuals and polluting industries, by reducing war costs and by assuming a rate of economic growth by 2010 that private forecasters and even some White House advisers consider overly rosy.

None of the new taxes and other sources of revenue, however, would take effect until the economy recovers, administration officials said.

Mr. Obama’s first budget was light on proposals to cut spending, despite his statement at the White House on Thursday that the government would be “cutting what we don’t need to pay for what we do.” But the cuts he does propose, contrasted against his new spending, underscore the change he seeks.

Mr. Obama would slash about $5 billion in the coming year for direct payments to agribusinesses and farmers with more than $500,000 in annual revenue, and $4 billion in annual subsidies to private banks that make college loans. Instead he would increase spending for government Pell Grants to needy students, and for the first time index the maximum yearly grant for inflation.

Those two cuts alone will provoke big fights with the farm and banking lobbies and their supporters in Congress.

Republicans and business groups condemned the tax proposals. Robert Greenstein, executive director of the left-leaning Center on Budget and Policy Priorities, praised the budget as “bold, courageous and honest” but acknowledged that it takes on “one vested interest after another, and that will require all of the president’s skills to get through Congress.”

Mr. Obama will need the help of Democratic leaders in Congress, who promised to get to work right away. Republicans, however, were quick to charge that the proposals to raise some taxes would be job-killers, and served notice that they would challenge Mr. Obama’s agenda by drawing an ideological distinction with the Democrats.

“I have serious concerns with this budget, which demands hardworking American families and job creators turn over more of their hard-earned money to the government to pay for unprecedented spending increases,” said the Senate Republican leader, Mitch McConnell of Kentucky.

Having inherited an economy in recession and reeling from interrelated credit and housing crises, Mr. Obama starts off from a stunning deficit for 2009 that is projected to reach $1.75 trillion when the fiscal year ends Sept. 30, or nearly four times last year’s shortfall. That would represent 12.3 percent of the gross domestic product, a deficit level that is larger than any since the end of World War II.

By the last year of his term, in the 2013 fiscal year, Mr. Obama projects a deficit of $533 billion, or 3 percent of the overall economy, a level that economists consider sustainable. Even so, he foresees the level of the nation’s debt held by the public rising from 58.7 percent in the current year to 67.2 percent in a decade, a level not seen since 1951.

Of the $3.55 trillion requested for the 2010 fiscal year that begins in October, more than $2 trillion is mandatory spending for the programs — chiefly Medicare, Medicaid and Social Security — that provide benefits to all who are eligible.

Departing from the free market orthodoxy of his predecessor, George W. Bush, Mr. Obama would use the government’s powers of spending and taxation to push the private market in new directions.

With higher taxes on the wealthy and savings squeezed from health care providers, drugmakers and insurers, Mr. Obama would create a $634 billion, 10-year “health reform reserve” as a down payment to finance disease prevention, wellness programs and research on cost-effective treatments ultimately to cut health care costs. More than any other expense, health care is driving future projections of unsustainable deficits. The health reserve would also be used to create affordable insurance programs for individuals and employers.

The president would remake the energy sector to reduce reliance on foreign oil and address global warming, by requiring industries to buy permits to emit the heat-trapping gases that contribute to global warming. The revenue would pay to develop alternative energy sources and to provide tax relief for Americans facing higher prices from utilities and industries passing on their permit costs.

Mr. Obama’s tax proposals would reverse a trend toward greater income inequality in recent years by adding about $1 trillion over 10 years to the tax burden of the top 5 percent of taxpayers, roughly those making more than $250,000 a year. He would let the Bush income-tax cuts lapse after 2010 as scheduled for people at that income — he would extend them for everyone else — and limit the deductions top-earners can take. He would also raise income taxes on hedge fund and private equity partners.

“Over the past two or three decades, the top 1 percent of Americans have experienced a dramatic increase from 10 percent to more than 20 percent in the share of national income that’s accruing to them,” Mr. Obama’s director of the Office of Management and Budget, Peter R. Orszag, said in a briefing for reporters. “So we are asking them to pitch in a bit more.”

Mr. Orszag emphasized that it was “just factually wrong” to say the administration was raising taxes in a recession because the tax increases and industry permits would not take effect until at least 2011.

Republicans pounced anyway, charging that Democrats were returning to their tax-and-spend habits of the past. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee, asked, “Where is the restraint on spending?”

Representative Steny H. Hoyer, a Maryland Democrat who is the House majority leader, dismissed the charge in an interview by recalling the six years during the Bush administration when Republicans controlled Congress. “What they did was raise spending and raise debt,” Mr. Hoyer said. “Now we are left with the obligation to try to get us back to balance.”

Mr. Hoyer predicted that the House, where Democrats have a significant majority, would pass an energy bill this year but that health care legislation might take longer. Both initiatives face bigger hurdles in the Senate, where Republicans have just enough votes to block legislation, requiring Mr. Obama to court the few Republican moderates, as he did to pass the $787 billion two-year economic stimulus package.

In a worrisome sign for the president, one of those Republican allies on the stimulus, Senator Olympia J. Snowe of Maine, in a statement called the president’s goals “worthy” but added, “While this budget claims to be long on fiscal responsibility and deficit reduction, it falls woefully short of these objectives.”

A significant share of Mr. Obama’s projected deficit reduction owes to assumptions about economic growth that are more optimistic than private forecasts. Some Obama advisers privately objected that the rosy projections would draw criticism about manipulating the numbers, but Christina D. Romer, the chairwoman of Mr. Obama’s Council of Economic Advisers, insisted to them that the projections were realistic.

After negative growth of 1.2 percent this year, the budget projects growth of 3.2 percent in 2010, and 4 percent or more in the following three years. In contrast, the consensus of business economists surveyed by Blue Chip Economic Indicators this month projected growth no higher than 2.9 percent through 2013.

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